Spender or saver? The choice may not be yours

JoshuaAckerman

CAMBRIDGE, Mass. (MarketWatch) — During a recession, why do some people spend money while others save?

Money issues can be grounds for conflict in relationships. One person may be a spender while the other is a saver. Throw in financial stress such as an economic recession and one person’s preference can seem completely irrational to the other.

How can people be so different when it comes to the “right” decisions? Recent research shows that our childhood economic environments have a lot to do with how we make financial decisions and handle financial risk later in life.

My colleagues and I recently conducted several experiments to determine how people’s responses to economic scarcity were impacted by the harshness of their early-life environments, as reflected by their childhood socioeconomic status. In one study, we determined people’s economic background and then asked questions such as: Would you prefer to have $20 tomorrow or $30 a month from now? We also asked questions about risk, such as: Would you prefer a certainty of receiving $20 or a 60% chance of getting $50?

We found that people who grew up in lower socioeconomic status environments were more impulsive, took more risks, and approached temptations more quickly after thinking about an ongoing recession. In contrast, people who grew up in higher socioeconomic status environments were less impulsive, took fewer risks, and approached temptations more slowly.

These results are in line with another well-known test of impulsivity frequently given to children called the Marshmallow Test. In that test, a child is presented with a marshmallow, but told to not eat it for a certain period of time in exchange for a second treat later. Researchers then tracked who ate the first marshmallow, how long they waited, and who was able to hold out for the second treat.

In an updated version, researchers added a measurement of how predictable a child’s home environment was to the test. Children who experienced a more predictable environment held out longer before eating the marshmallow. ConvergEx stock market strategist Nick Colas summed up the results in this recent commentary posted on the Zero Hedge blog:

Joshua Ackerman

Wrote Colas: “If you trust your surroundings, whether you be 4 or 40, you are more likely to forgo immediate reward for a later and larger payoff.”

Such findings are consistent with the premise of life-history theory, which in essence says that the degree of harshness and predictability in your early life environment can sensitize your responses to adult problems, creating a pattern of behavior that emerges most strongly when you are faced with decisions during stressful times in adulthood.

As a result, those who grow up in resource-poor environments (which can lead to relatively shorter lifespans compared to those people growing up in more resource abundant environments) focus more on efforts linked to reproduction. Those efforts may seem impulsive and include spending money on flashier things to attract a mate like jewelry and cars.

In contrast, those who grow up in a predictable environment — where things like food and health care are abundant — are more focused on the long-term and more likely to save money. Thus, they tend to hold out for the $30 a month from now, or for that second treat, because of their outlook.

Paths out of poverty

Interestingly, in all of our experiments we found that the behavior tendencies associated with early-life environments only emerged under conditions of economic uncertainty. Otherwise, they were dormant.

This life history approach may provide insight into why certain areas of our country have a long history of higher poverty rates. Poverty may breed future poverty in that children who grow up in lower-income households also grow up to be relatively bigger spenders in the face of economic stress, despite the long-term usefulness of saving resources at those times.

While it might seem unwise from an economic perspective to spend money on material things during a financial crisis, this behavior can be deeply rational from an evolutionary perspective.

This perspective underscores the notion that not everyone will respond in a universal fashion to recessions. So the next time you have a disagreement with your spouse about money, consider if their childhood environment may be playing a role in whether they want to spend or save.

These insights also might be useful for businesses and governmental agencies that encourage saving or spending behavior. People may react to recessions in different ways, depending both on how they perceive the current impact on their pocketbooks and also on their more distant childhood backgrounds. Some will increase their savings rates while others will increase spending.

If a specific behavior is deemed “better” — like saving — then we might want to craft unique interventions to target people whose default tendency is to seek short-term gain by spending in the face of stress. For example, one approach may involve emphasizing the short-term costs of spending.

Simply labeling this behavior as irrational isn’t enough. Instead, we must think more strategically regarding the fit between financial messages and audiences, perhaps by taking into account individuals’ life histories, in order to help break patterns of decision-making that contribute to enduring poverty cycles.

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